Setting Realistic Goals for Your Trading

Setting realistic expectations for your trading is a big part of staying in this business long-term. Here's how pro trader Brian Shannon handles it.

How should you be managing your expectations as a trader? Today, we’re talking with Brian Shannon about that. Now, Brian, I know a lot of people expect that every trade should be a winner, and that’s really not realistic. What do you say about that?

Yeah, that’s not realistic at all. That’s fantasy land. No one I’ve met is capable of doing that. No machine is capable of doing that. Everyone at some point loses money in the market and makes big mistakes. We’ve seen some high profile ones recently, you look at, you know, JP Morgan. The chairman of Green Mountain Coffee Roasters got a huge margin call. John Paulson’s hedge fund was down 13% last month and you know if you look at what everyone else is doing out there and try to put this perfection upon what you’re doing, it’s simply unobtainable. Trading and investing can be emotional and we let our guard down and the market really has an uncanny ability to find any weakness and really exploit it quickly. So there is going to be mistakes always. The key is to limit them as much as possible with a good risk/reward going into the trade and having a backup plan and saying, if it doesn’t work, here’s how much I’m willing to accept in terms of losses.

Let’s talk a little bit then about sort of a qualitative mistake that you believe people make and that is looking too much at the story or thinking maybe it’s a good company, so therefore a good stock. Is that also a mistake?

That is a big mistake, yeah. You know, I’ve kind of been placed in a box of just a technical analyst because I wrote a book about technical analysis. But I look at news headlines. I’m aware of what’s going on but I sometimes see some really ridiculous things. You know, Facebook just recently came public and the rumor was that they were going to buy Research in Motion with all of this IPO cash and the stock jumped maybe a point that day or something, but it was in such a clear obvious downtrend and it’s maybe 10-15% lower today. That just one look at the chart tells you that this isn’t the candidate for a takeover. People are selling this stock. It’s been hitting new lows everyday pretty much for the last couple of years. So it’s good to be aware of the news and news can be a good starting point, but if you see a good headline and the reaction to the stock isn’t what you expect or let’s say you see bad news and you expect the stock to get hit, instead it’s rallying and it’s in an uptrend, we don’t want to sell short that stock. Somebody else is accumulating shares and maybe knows something that’s not in the news.